A revolutionary investment portfolio for retirees

Even though I left the money management business as a formal profession long ago to become a TV anchor, I still helped my parents and other friends try to manage their money. That didn’t stop when I quit the business back in 2007. I even used to talk my mom through the process and give her detailed advice on air as part of my show. And by the way, for the month of April, I’m going to open up and offer a free trial to my TradingWithCody.com service (a $99 value) for ALL Scutify members. Just send a direct message or a scuttle to @renemooshy and we’ll work with you to set it up.

After finishing up a recent Deep-Dive Portfolio Analysis for a retired couple whom we’ll call St. Nick and Ms. Claus, I realized it’d be rather instructional and puts in real-life terms much of what I talk about when I say we have to work very hard to navigate the Revolution Investing times we live in.

I start off by telling every Deep-Dive customer that I want to be clear that I do not have a magic silver bullet to low-risk riches and income. As a direct result of 0% interest rates, QE, and all the other extreme “emergency” measures that the Federal Reserve and the Republican/Democrat regime have forced upon us, you can’t get any meaningful income from CDs, short-term Treasurys, bonds, money markets or any other “low-risk” asset class.

When we say that those policies punish retirees, this is what we mean. St. Nick sold his successful business more than two decades ago, after having built it up from nothing when he’d started it in his early 20s. Without dependent heirs, they’d put the millions they’d made into bonds and bond funds that were paying 10% or more in interest annually back then. They owned a small house in the U.S. and a small villa in a foreign country. They’d spent the last couple decades living frugally off that income even as it dwindled down — courtesy of the ever-lower interest rate environment that has been the trend the whole time they’d been invested.

St. Nick and his wife are both into their 70s now and he had recently recognized that both historically-speaking and even just math-based speaking, that there’s no way for interest rates to get any lower on their bonds or any other income producing investment class. 0% is zero, right? That said, he doesn’t want to spend a bunch of time and money re-building his portfolio with new money managers and brokers and asset classes he doesn’t understand.

So I spent weeks losing sleep trying to find them some sort of reasonably low-risk way of creating income off their savings. Their time horizon is, they said, just another decade or two, and if they have to dip into some of their principal to make ends meet as a result of the 0% interest rate environment they’re stuck with right now, that’s not the end of the world. But still, it’s obviously ideal to come up with a plan that does try to get them as much yield as possible with as little risk overall to their lifestyle and future.

I drew them out a rough asset-class pie chart purposely using pen and paper rather than a computer-generated perfect chart because I wanted to underscore that my allocation suggestions were “rough” in nature and that they need to do their own final bit of homework in deciding just exactly how much they should allocate to each asset class.

I initially split the pie into four pieces — roughly 20%-25% to remain in bonds, roughly 25%-30% to go into high yielding stocks/stock funds, roughly 20%-25% in cash including a tiny bit of that in actual stacks of bills that they will always have access to, 25% in other asset classes. I’m not a bond analyst and I suggested they stick with their current bond broker to manage that part. They can get about 4.5%-5% yield in those bonds/bond funds right now, which isn’t great, but isn’t horrible either given 0% interest rates elsewhere. The issue as rightly pointed out by St. Nick in our discussions is that the selling price of those bonds are likely to head lower as rates have to head higher and that will cut into their principal over time.

They’re going to slowly take out the money to fund the other suggested asset classes over the next few months or year or so. This is a long-term, final plan for them, and we’re not trying to rush any of this or take any penalties to diversify this money.

Some of the high-yield stocks I highlighted for them included Intel, Verizon, and Icahn Enterprises. The stocks I highlighted would net about 4% dividend yield per year. Stock markets obviously have risk in them, and individual stocks even more so and there’s always the risk of another market crash in their lifetime. Again, this is a real-life example of retirees being forced into a risk-on investment class because they simply cannot survive on safe income from 0% interest rates. $INTC$IEP

For stock funds, I highlighted two 7% yielding instruments — one is mostly an energy play, the Oppenheimer SteelPath MLP Income Fund
/quotes/zigman/595191/realtimeMLPDX, and the other invests in global stocks with the highest yields they can “safely” find, the Global X SuperDividend exchange-traded fund
/quotes/zigman/5374181/delayed/quotes/nls/sdivSDIV. I went back to the pie chart and drew in a slice taking up about a fifth of the stock slice and wrote in “High Yield Stock Funds.” As a way of diversifying the risk in their portfolio and with the 7% yield better than I can get in other relatively liquid assets, there’s some sense in putting some money into these kinds of funds. But once again, this is another classic example of retirees being forced into risk-on investments. $SDIV

I then carved the final “Other Asset Class” slice of the pie chart into smaller pieces and wrote “Gold/silver” in one of them. You know that I think there’s a place for physical gold and silver in everybody’s long-term portfolio, even a small allocation for retirees. There are high-yielding royalty plays in the gold and silver industry, but I didn’t like the risk/reward or financial profile of the plays I’d found there. $GOLD

I also suggested they take a small fraction of their portfolio and invest it in a few small private companies or startups or angel investment opportunities that all people with money are confronted with at times. Call them lottery tickets and don’t ever expect to get your money out of them if you do invest in small companies or startups. But looking out 10 years, this is the place that would provide the most potential upside, along with the most risk. Note I said “Small fraction of their portfolio” for this part.

Net/net, we created a portfolio that would yield enough cash for them to live on for the next year or two and then we are going to have to continue to stay somewhat active in keeping the yield and risk in the portfolio in a place St. Nick and Ms. Claus will be comfortable with.

Like I said, I don’t have any magic silver bullet solutions and anybody who tells you they do is a liar. But we have to continue to Revolution Invest and navigate this retiree-and-responsible-saver-punishing economic world we live in proactively. You have other ideas for retirees seeking safe and diversified income streams? Let me know in the comments below or on Scutify.

Cody Willard writes Revolution Investing for MarketWatch, posts the trades from his personal account at TradingWithCody.com, which is not affiliated with MarketWatch, and is the largest shareholder in Scutify‘s parent company, Wall Street All-Stars. At time of publication, Cody was net long Intel, physical gold and silver. Follow Cody on Twitter at twitter.com/codywillard.

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About The Cody Word

Cody Willard writes the Revolution Investing investment newsletter for MarketWatch and posts the trades from his personal account at TradingWithCody.com He is the founder of WallStreetAll-Stars.com and the principal of CL Willard Capital. Cody serves as an adjunct professor at Seton Hall University and is on the University of New Mexico Alumni Board. He was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. Cody, a former hedge fund manager, and his stock picks and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno, ABC’s 20/20, CBS Evening News, CNBC’s SquawkBox, Jon Stewart’s The Daily Show, as well as in the Financial Times, Wall Street Journal, New York Times, and many other outlets.